A Guide to Crypto Asset Categories

Understanding the foundational concepts behind the different types of digital assets is the first step toward building meaningful literacy in this space. This guide breaks down the major categories, providing the conceptual depth and context needed to understand their utility and investment principles without focusing on specific projects.

1. Payment Coins & Stores of Value

Concept: The digital commodities

These assets are designed to function as a new form of money, programmable, borderless, and independent of any central bank. Their value is derived from scarcity, security, and network adoption.

●     Store of value assets: These are often treated as the digital equivalent of gold. Their value rests on fixed supply, a decentralised network, and a security track record of over a decade for the most established assets. The approval of spot ETFs for this asset class in the U.S. marked a significant moment of institutional legitimisation.

●     Payment-focused assets: These are designed for institutional or retail cross-border payments, processing transactions in seconds at a fraction of a cent. Projects in this space often form partnerships with financial institutions but have also faced prolonged legal battles with regulators, making them a closely watched area for regulatory precedent.

These assets are foundational. Their value is driven by network effects and macroeconomic trends, not company earnings. They can experience significant drawdowns in bear markets.

2. Smart Contract Platforms (Layer 1s)

Concept: The blockchain operating system

A smart contract is a self-executing piece of code that lives on a blockchain and runs automatically when predefined conditions are met. Layer 1s are the foundational infrastructure upon which these applications are built.

●     How they work: The native token of these platforms is used to pay for all network computation, often called “gas fees.” In recent years, some of the largest platforms have transitioned to more energy-efficient consensus mechanisms, reducing their energy consumption by over 99%.

●     The trade-off: There is an ongoing technical debate between decentralisation, security, and scalability. Some platforms prioritise high speed and low cost, which can lead to occasional network outages and a more centralised validator structure compared to their more established counterparts.

Owning a Layer 1 token is a bet on its entire ecosystem. The key risk is competition, as no single platform is guaranteed long-term dominance.

3. Layer 2 Scaling Solutions

Concept: The highway extension of blockchain

Layer 2s are built on top of Layer 1s to make them faster and cheaper. The dominant technology is the rollup, which bundles transactions off-chain and settles them as a single proof on the main chain.

●     Optimistic rollups: These assume transactions are valid by default and use a fraud-proof system, giving network participants a window of time to challenge invalid transactions.

●     Zero-knowledge (ZK) rollups: These use advanced cryptography to generate proof of validity for a batch of transactions without revealing the underlying data, offering near-instant finality. Major enterprise partnerships with brands in retail and social media have been formed using this technology.

Layer 2 tokens are newer and more technically sophisticated, generally carrying higher volatility and risk than their underlying Layer 1s. Their success is directly tied to the adoption of the Layer 1 they are built on.

4. Decentralised Finance (DeFi) Protocols

Concept: Banking without banks

DeFi rebuilds the traditional financial system using open-source smart contracts. At its peak, the DeFi sector locked over $180 billion in these contracts.

●     Lending & borrowing: These protocols allow users to deposit assets to earn yield or borrow against collateral without needing a bank.

●     Decentralised exchanges (DEXs): These platforms enable the peer-to-peer trading of digital assets using an automated market maker (AMM) model instead of a traditional order book.

DeFi protocols are direct bets on the adoption of decentralised financial services. Risks include smart contract bugs, oracle failures and governance attacks.

5. Stablecoins

Concept: The plumbing of the crypto universe

Stablecoins are tokens designed to maintain stable value by being pegged to a real-world currency, usually the U.S. dollar. They are a utility for trading and settlement, not a growth investment. The EU’s MiCA framework set formal reserve and disclosure requirements for this category in 2024.

●     Asset-backed stablecoins: These are backed 1:1 by cash and cash equivalent reserves. The largest and most transparent of these have faced challenges, including brief de-pegs during traditional banking crises and regulatory settlements over reserve transparency.

●     Algorithmic stablecoins: These use code to maintain their peg. This model has proven to be extremely high-risk, as demonstrated by a major collapse in 2022 that erased approximately $40 billion in value.

Risks include counterparty and regulatory risk

6. Real World Assets (RWA)

Concept: Tokenising the real world

RWA tokenisation creates a digital token representing ownership of a real-world asset, bringing traditional finance onto the blockchain.

●     Tokenised securities: This includes digital representations of U.S. Treasury bills, bonds, and other financial instruments. The launch of a tokenised treasury fund by the world's largest asset manager in 2024 was a landmark moment for this category.

●     Tokenised commodities: This involves creating tokens backed 1:1 by physical commodities like gold, allowing for fractional ownership and 24/7 trading.

RWA is a significant growth area bridging traditional and decentralised finance. Risks include counterparty risk, regulatory uncertainty, and smart contract vulnerabilities.

7. AI & Decentralised Compute

Concept: The fastest-growing frontier

These projects create open, decentralised markets for the computational power required to run AI models and other intensive tasks.

●     Decentralised GPU markets: These platforms connect those needing GPU power for rendering and AI with a global network of GPU owners who have spare capacity.

●     Decentralised intelligence networks: These are marketplaces for machine intelligence itself, where participants contribute AI models and are rewarded based on the quality and utility of their contributions.

AI-related crypto tokens are highly speculative and often driven by narrative hype. Investors should distinguish between projects with genuine utility and those simply capitalising on a trend.

8. Oracle Networks

Concept: Connecting the blockchain to reality

Oracles are essential middleware that source, verify, and deliver real-world data (like stock prices, weather, or sports scores) to on-chain smart contracts.

●     Decentralised Oracle networks: The market leader uses a large, decentralised network of independent node operators to source and validate data, providing high security and reliability.

●     First-party Oracles: A newer model sources data directly from high-frequency, institutional sources like trading firms, enabling sub-second latency for time-sensitive applications.

Oracle networks are critical infrastructure plays. Their value is directly tied to the overall health and adoption of the DeFi and smart contract ecosystem.

9. Privacy Coins

Concept: Financial confidentiality on the blockchain

Privacy coins use advanced cryptography to make transaction details confidential and untraceable.

●     Default privacy: The most established privacy coins make all transactions private by default, using technologies like Ring Signatures, Stealth Addresses, and RingCT to obscure all details.

●     Opt-in privacy: Other platforms use technologies like zk-SNARKs, but make privacy an optional feature. This has limited their real-world privacy, as most users default to transparent transactions.

Privacy-enhancing technologies are heavily scrutinised by regulators. Many exchanges have delisted these assets to avoid legal and compliance complications, creating significant liquidity risk.

10. Governance & Utility Tokens

Concept: Ownership and access within ecosystems

These tokens provide specific rights or functions within a decentralised protocol or platform.

●     Governance tokens: These grant holders voting rights on the future direction of a protocol, such as whether to implement new features or change fee structures. The debate over activating a "fee switch" on the largest decentralised exchange is a major example of this in action.

●     Utility tokens: These are used to pay for services, get discounts, or access features within an ecosystem. Some platforms also use a "burn" mechanism (permanent destruction of tokens) to create deflationary pressure and increase the value of remaining tokens.

The value of these tokens is directly tied to the success and adoption of the platform they govern. They are also subject to regulatory scrutiny over whether they should be classified as securities.

11. NFTs & Digital Collectables

Concept: Ownership of the unique

A Non-Fungible Token (NFT) is a unique digital certificate of ownership recorded on a blockchain. Unlike fungible assets like currencies (where one unit is identical to another), each NFT is one of a kind.

●     Digital art & collectables: This was the first major use case, with major auction houses conducting multi-million dollar sales of NFT art on the most prominent smart contract platform.

●     Gaming & Metaverse assets: NFTs are used to represent in-game items, virtual land, and character skins, giving players true ownership of their digital assets. Specialised Layer 2 blockchains have emerged to offer gas-free minting and trading for these use cases.

While the initial hype was focused on digital art, the underlying technology of verifiable digital ownership has applications in intellectual property, ticketing, and identity.

12. Culture Coins & Memecoins

Concept: The power of community

Memecoins are a unique class of digital assets that derive their value almost entirely from community belief, social momentum, and cultural relevance rather than technical utility.

●     How They Start: Many are created as parodies or jokes. The original memecoin, created in 2013, still maintains a multi-billion-dollar market cap despite having no supply cap, purely due to its strong community and brand recognition.

●     The Investment Thesis: Investing in memecoins is pure speculation on social momentum and the attention economy. Their value is 100% a function of collective belief and can experience extreme price swings of 70% - 90% in very short timeframes.

The vast majority of these projects eventually go to zero. They are the highest-risk category in the digital asset space and should be approached with extreme caution.

Where to Go From Here

The crypto universe is a collection of different technologies, each with its own purpose and risk profile. The most important habit for any investor is to ask: What does this asset category actually do? Who is it for? Why does it need a blockchain? If those questions have clear, compelling answers, the category has a reason to exist. If they don't, proceed with caution.